Why is cash flow important to many here?

Buying & Selling Real Estate
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Why is cash flow important to many here?

Stuart M.
Boca Raton, FL · Member since 2017 · 111 posts · 45 votes

I was thinking in a long term view.  Take two examples, tell me which you'd buy.

House 1:

100k house, 5k down, 20k in repairs

Rents for 2k

Cash flow is 500/mo

House 2:

500k house, 25k down, no repairs

Rents for 4k

Cash flow is 0 after PITI, Insurance, etc.

House 1, in 30 years you own a house free and clear that is worth 217k, and if you saved the 500/mo at 7% return, 640k in the investment acct, 857k total.

House 2, in 30 years you own a house free and clear that is worth 905k, even ignoring cash flow from rent raises for year 2-30.

A few notes.

In both cases, I assume house appreciation tracks inflation (2%) as it has on average for a long time.  If you assume greater appreciation, House 2 does even better.

I included no "cash flow" for house 2 but I assumed 2% increase in cash flow for House 1 yearly.  However, House 2 would probably begin to cash flow in year 2 at first rental raise, and I didn't include any of that in the long term projections.

Also, why do people consider House 1 to "cash flow" if the mortgage is paid down $137 in month one and you get $500 cash ($637 total), but House 2 doesn't "cash flow" even though the mortgage is paid down $684 in month one?  Both are off an initial 25k outlay.  Both seem like money in the bank to me.

It seems to me that we're investing in land here (there is not much of a price difference between a water heater for a 500k house and a 120k house or a call to unclog a toilet - in fact, those numbers work against House 1 - and usually a majority of the difference between a 500k house and a 120k house is the dirt it sits on) and if that's the case, aren't we aiming to leverage as much money as possible to buy as much land as is possible, in the long run at least, and have some tenants make the payment for us in the meantime?  Seems like appreciation is the key.

What's your take on this.  What am I leaving out, missing, etc, I'd like to hear other opinions.

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Llewelyn A.
Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes
8y

@Stuart M.

Hi Stuart. I'll probably be one of the only few that will lean towards House 2 approach.

I've been buying houses in Brooklyn, NY for the last 20 years. It's your House 2 on steroids.

Results are incredible. Real Example:

Year 2000:

Purchase Price: $140k, $21k down and $7k Closing, $119k Mortgage

Rent: 2 Units at $500 each per month

Cash Flow: ZERO

Repairs: $40k

------------------------

Year 2017

Current Value: $1 Million

Profit if Sold: $1 Million minus $40k Repairs minus $21k down minus $7k Closing minus $80k Mortgage Balance minus $50k in Commissions minus $35k Seller's Closing Costs = $767k profit on $21k down plus $7k Closing plus $40k in repairs = $767k / $68k = 1,128% ROI just on Appreciation and Mortgage Reduction.

Current Rents are $1,850 for Unit 1, $1,900 for Unit 2. Cash Flow is approximately $2.5k per month

-----------------------

I started getting Cash Flow in Year 3 with the above property.

I used the Equity to Buy other properties. In fact, all other properties came from the Equity of the previous properties.

Some call it luck. I did this 8 times in 20 years. Virtually all properties are similar to this one.

I will say that I was also a highly paid Programmer when I graduated College in 1997 and didn't need the Cash Flow to put food on the table.

BUT, I will also say that if you don't need the cash flow, you can get into these kinds of lucrative properties.

You can't just do the numbers. You need to assess the long term effects of economics as well as other external scenarios like Climate Change.

I'm not sure about Boca Raton or where you are planning on investing finally.

Florida will deal with Rising Sea Levels, but 2017 was devastating in terms of Hurricanes. Prices will be in the next 30 years will depend on what Florida does to counteract Climate Change, if anything can be done. If anything, you will have to take into account higher increasing Hurricane Insurance over the future years.

That's also the beauty with doing a long term analysis. It makes you think of the future. I normally put together a 10 year projection and take into account all the effects of future Economics and other things like Climate.

Just like a Squirrel who has to put away nuts for the winter, if that little animal didn't think of the future, he'd starve to death before the Spring!  

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  • Stuart M.
    OP
    Boca Raton, FL · Member since 2017 · 111 posts · 45 votes
    8y
    Originally posted by @Ihe O.:
    Originally posted by @Stuart M.:
    Originally posted by @Eric Bell:
    But I didn't read the repairs part so that changes things a bit...my basic point is i use cash flow to snowball into my next property.

     That's kind of the thing though...you're throwing 20k into these wrecks in awful areas...getting into them for 25k, instead of getting into something nice for 25k that will appreciate more over the long run.

    Because in the right area that wreck can easily get you $1k a month in rent whereas the appreciation you are hoping for might never happen.

     That is definitely a possibility.  I could buy into the next Detroit, and in 30 years House 1 is worth 30k and House 2 is worth 125k.  I realize this risk.  Somewhere around 1% appreciation is the breakeven point.  Conversely, if you don't invest all your cashflow for the next 30 years and don't get 7% returns on those investments, the numbers are worse for House 1.  There are many scenarios either way, I'm trying to figure out how most people see things here.

    0Reply
  • Stuart M.
    OP
    Boca Raton, FL · Member since 2017 · 111 posts · 45 votes
    8y
    Originally posted by @Michaela G.:

    Number 1 is investing, number 2 is speculating. 

    With number 2, where you just break-even, you are speculating, that the values will always go up. 

    Yes, you can make money both ways, but speculating is much riskier, because there are a number of factors that can throw a wrench into your gears. 

    What happens, if there's a correction in the next 30 years? Values will come down and you'll be underwater. With a bubble bursting, rents will often come down as well. People won't be able to afford 4K rent. Now you'll have some serious negative cashflow. 

    Who do you think survived the last cash better? Those with break and butter homes or those with luxury homes?

     Neither is risk free.  There is an awful lot of risk buying these 100k houses in war zones that I see going on.

    I assumed 2% appreciation to track expected inflation because that's what houses have averaged forever here.  Of course there are many variables - everyone leaves for example.  This also harms rents though.  I'm not trying to make this about speculating on above average appreciation, about picking the next NYC, I have no special insight there.

    I looked at rent declines during the last housing bust, which had larger declines than we could possibly see now, and I didn't see that large of declines in most metro areas - and many just had stagnant rents for a while. I understand that risk.

    0Reply
  • Paul NA
    Investor · White Plains, NY · Member since 2017 · 17 posts · 11 votes
    8y
    Originally posted by @Stuart M.:
    Originally posted by @Michaela G.:

    Number 1 is investing, number 2 is speculating. 

    With number 2, where you just break-even, you are speculating, that the values will always go up. 

    Yes, you can make money both ways, but speculating is much riskier, because there are a number of factors that can throw a wrench into your gears. 

    What happens, if there's a correction in the next 30 years? Values will come down and you'll be underwater. With a bubble bursting, rents will often come down as well. People won't be able to afford 4K rent. Now you'll have some serious negative cashflow. 

    Who do you think survived the last cash better? Those with break and butter homes or those with luxury homes?

     Neither is risk free.  There is an awful lot of risk buying these 100k houses in war zones that I see going on.

    I assumed 2% appreciation to track expected inflation because that's what houses have averaged forever here.  Of course there are many variables - everyone leaves for example.  This also harms rents though.  I'm not trying to make this about speculating on above average appreciation, about picking the next NYC, I have no special insight there.

    I looked at rent declines during the last housing bust, which had larger declines than we could possibly see now, and I didn't see that large of declines in most metro areas - and many just had stagnant rents for a while. I understand that risk.

     Unfortunately I don't think this conversation is going to change your mind and of course if acquiring property #2 works for you, then you should continue to do it. I think for lot of us the risk is not the same...and when I look at properties in Fairfield County for $150ish...they aren't considered to be "war zones". Just imagine the holding costs for the #2 And god forbid if tenant jumps ship...good luck finding another one overnight.

    0Reply
  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    8y
    I think you are making a lot of assumptions that help you lean toward the $500k house. First, assuming a $100k property is in a war zone is dead wrong. A $100k fixer could easily be in a B+ to A neighborhood in most of the country. Second, you are assuming that the $100k property is still worth $100k after a $20k renovation, which would be a terrible investment. In my world, that house should be worth $200k-$250k after repairs. So that gives you up to $100k instant equity to use towards another purchase, whereas you purchased the $500k property at market value, with no equity. I would pick option 1 without hesitation. Cash flow every month, instant equity, and the ability to buy several more properties with the same cash in deal.
    3Reply
  • Stuart M.
    OP
    Boca Raton, FL · Member since 2017 · 111 posts · 45 votes
    8y
    Originally posted by @Michaela G.:

    @Llewelyn A.

    Then lets compare those scenarios with 'all cash'

    1. pay 100K and get 2K per month - that's roughly 24% ROI

    2. Pay 500K and get 4K per month - that's roughly 10.4% ROI

     Wellllll....not exactly.

    Implicit in the scenarios is that with House 1, other expenses are $1046 ($137 mortgage balance reduction and $500 cash monthly and $317 interest to bank) and other expenses in house 2 are $1733 ($684 mortgage balance reduction monthly and $1583 interest to bank).

    So if you paid cash, House 1 is $954*12/120k = 9.54% ROI and House 2 is 2267*12/500k = 5.44% ROI. I will stipulate House 2 is dumb if paid in cash, but in reality, the point is to leverage the banks money to acquire more land. I don't have 500k laying around and if I did, that's up to 20 downpayments on other nice houses....

    0Reply
  • Llewelyn A.
    Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes
    8y

    @Christian Hutchinson

    @Stuart M.

    I know it's difficult to believe but a lot of companies are actually Real Estate companies rather than retail or selling a particular product. McDonalds come to mind. Their Real Estate Holdings is amazing! The burgers pay for the upkeep of the Property they bought and bingo, their market returns are great!

    Here is just one of many articles about McDonalds: MCDONALD’S REAL ESTATE: HOW THEY REALLY MAKE THEIR MONEY

    I also trade and invest in the Stock Market. But I do MUCH better with the leverage from Investing in Appreciating Real Estate in Brooklyn. Much better than the indexes.

    Also, one way Fund Managers choose to add particular stocks into their portfolio is by analyzing their future cash flows and projecting their Enterprise Value to their free cash flow.

    When I worked for the large financial institutions, while I wasn't a Fund Manager, I created the software that they used to analyze the individual stocks. I use the same techniques to analyze Real Estate.

    I basically project the Total Value (FMV minus Debts) divided by the Cash Flow over a 10 year basis. The calculations are all done the same way.

    It's amazing what you can do with spreadsheets and some economics.

    Stuart: I am in contract to purchase a $2 Million 3 Family house. Climate Change will affect NYC, true. But, before it gets worse, it will get better. I am projecting that in the next 5 to 10 years, NYC winters will become warmer. As the weather warms up, there are risk for more hurricanes, which is why I don't buy near the waterfront or in areas that will become a flood zone.

    I am also projecting that as the hurricanes get worse for the Caribbean and the Southern States, more people will migrate to NYC, Philly and possible Boston 

    When I feel that it's a turning point and it's time to sell, I will, which is why I just became a Broker in anticipation that in about 10 years I'm going to prepare to sell. OR, maybe NYC will spend a lot of money to mitigate the effects of climate change which could help for another 10 years.

    I'm also going to start buying in other States after I get reciprocity for my Broker's License, concentrating on Cities that can be least affected by climate change.

    The point is that I'm prepared to do what's necessary but have an eye on the future. So far, I have been right for the last 2 decades while I kept on hearing "What are you crazy? Buying at that price?!" I know it's difficult for people to think that the property that i'm buying for $2 Million will be $4 Million easily in 10 years. But it was the same expression I heard when the property I bought for in the year 2000 at $140k is now worth $1 million in 17 years.
    4Reply
  • Paul NA
    Investor · White Plains, NY · Member since 2017 · 17 posts · 11 votes
    8y
    Originally posted by @Llewelyn A.:

    @Christian Hutchinson

    @Stuart M.

    I know it's difficult to believe but a lot of companies are actually Real Estate companies rather than retail or selling a particular product. McDonalds come to mind. Their Real Estate Holdings is amazing! The burgers pay for the upkeep of the Property they bought and bingo, their market returns are great!

    Here is just one of many articles about McDonalds: MCDONALD’S REAL ESTATE: HOW THEY REALLY MAKE THEIR MONEY

    I also trade and invest in the Stock Market. But I do MUCH better with the leverage from Investing in Appreciating Real Estate in Brooklyn. Much better than the indexes.

    Also, one way Fund Managers choose to add particular stocks into their portfolio is by analyzing their future cash flows and projecting their Enterprise Value to their free cash flow.

    When I worked for the large financial institutions, while I wasn't a Fund Manager, I created the software that they used to analyze the individual stocks. I use the same techniques to analyze Real Estate.

    I basically project the Total Value (FMV minus Debts) divided by the Cash Flow over a 10 year basis. The calculations are all done the same way.

    It's amazing what you can do with spreadsheets and some economics.

    Stuart: I am in contract to purchase a $2 Million 3 Family house. Climate Change will affect NYC, true. But, before it gets worse, it will get better. I am projecting that in the next 5 to 10 years, NYC winters will become warmer. As the weather warms up, there are risk for more hurricanes, which is why I don't buy near the waterfront or in areas that will become a flood zone.

    I am also projecting that as the hurricanes get worse for the Caribbean and the Southern States, more people will migrate to NYC, Philly and possible Boston 

    When I feel that it's a turning point and it's time to sell, I will, which is why I just became a Broker in anticipation that in about 10 years I'm going to prepare to sell. OR, maybe NYC will spend a lot of money to mitigate the effects of climate change which could help for another 10 years.

    I'm also going to start buying in other States after I get reciprocity for my Broker's License, concentrating on Cities that can be least affected by climate change.

    The point is that I'm prepared to do what's necessary but have an eye on the future.

    So far, I have been right for the last 2 decades while I kept on hearing "What are you crazy? Buying at that price?!"

    I know it's difficult for people to think that the property that i'm buying for $2 Million will be $4 Million easily in 10 years. But it was the same expression I heard when the property I bought for in the year 2000 at $140k is now worth $1 million in 17 years.

     Congrats on having the Midas touch...I think lot of assumptions in the #2 scenario gives newbies false hope...yeah if I was Warren Buffett or a company with deep pockets I wouldn't worry about the high price properties...it's all relative.  But to start to throw in information about risk tolerance of millionaires vs others doesnt make sense.  Again, just my opinion.

    0Reply
  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    8y
    Originally posted by @Stuart M.:
    Originally posted by @Michaela G.:

    @Llewelyn A.

    Then lets compare those scenarios with 'all cash'

    1. pay 100K and get 2K per month - that's roughly 24% ROI

    2. Pay 500K and get 4K per month - that's roughly 10.4% ROI

     Wellllll....not exactly.

    Implicit in the scenarios is that with House 1, other expenses are $1046 ($137 mortgage balance reduction and $500 cash monthly and $317 interest to bank) and other expenses in house 2 are $1733 ($684 mortgage balance reduction monthly and $1583 interest to bank).

    So if you paid cash, House 1 is $954*12/120k = 9.54% ROI and House 2 is 2267*12/500k = 5.44% ROI. I will stipulate House 2 is dumb if paid in cash, but in reality, the point is to leverage the banks money to acquire more land. I don't have 500k laying around and if I did, that's up to 20 downpayments on other nice houses....

    Huh? My numbers are based on 'all cash', so, why are you throwing morgages in there? 

    1Reply
  • Stuart M.
    OP
    Boca Raton, FL · Member since 2017 · 111 posts · 45 votes
    8y
    Originally posted by @Michaela G.:

    @Llewelyn A. , again, I agree, that you can make money with the 2nd scenario, but you need deeper pockets, because there are many more moving parts.

    And it doesn't look as if someone that's asking about 5% down has the funding that is necessary, if any of those zig, when he's expecting a zag. 

    There are many ways to make profit in real estate, but not all correspond to someone's strengths and weaknesses and that's when investors get into trouble. 

    I would again say that house 2 is based on speculation. Many speculator make fantastic profit. And many have failed fantastically. There's simply more risk. 

    The 5% down is because if the name of the game is to leverage the banks money to buy as much land as possible, then that's what you do. Would you pass on 0% down? I got 5% down last time, that's the lowest I've seen people be able to reasonably go without starting to pay out the nose (FHA 3.5%?) so that's what I based my assumptions on. Even if I COULD put 20% down, that's 4 of the same houses at 5%, I will always put the min down. Even if it "cash flows" at 20% down and doesn't at 5%. Also, having that last 15% in the bank still could account for a broken water heater, a new roof, etc.

    If banks offered 5% down unlimited number 4% rate investor loans, I'm imaging we'd have 100% of people here taking them.

    There are plenty of cash flow positive when purchased homes that say empty for years in Detroit and had no cash flow.  We're all gambling here, and I'm still not sure how the risk on five 120k homes is significantly different than the risk on one 600k home in the same city.  Especially if it took 150k out of pocket to acquire/ready the first five and only 30k for the expensive one.  We can all make assumptions - "it'll be harder to rent a 600k house than five 120k houses during a recession" but "the poor get fired first, not the Drs..."  Anything can be rationalized.  I appreciate all the feedback though, it makes you realize some of the risks you're taking on, different scenarios, etc.

    0Reply
  • Cara Lonsdale
    Realtor and Investor · Scottsdale, AZ · Member since 2017 · 1k+ posts · 1k+ votes
    8y

    So when do you intend to sell propert # 2?  What if you are at the point of retirement, and need to cash out to get that equity, and it is 2008.....and now your property is NOT worth $905K, but rather $290K, and you are at a loss.

    THEN what if NOT ONLY do you have no cash flow, but now it is NEGATIVE, because not only the RE sales market tanked, but also the rental market tanked, and you are paying OUT $1,250 per month just to hold on to the property that isn't worth the money you paid for it years ago?

    Cash flow is important for many reasons.  However, it's required in order to bridge the gap between market waves.  When appreciation becomes depreciation, cash flow is what will get you through to make sure that your decision to sell is based on a favorable choice, not a requirement.

    A smart investor will buy and sell in any market condition, but will shift to accommodate that condition.

    I know it is easy to put pen and paper to calculate a perfect scenario.  However, there are alot of unknowns out there that make your calculations irrelevant.  I am a Realtor (since 1997) and a seasoned investor (since 2002) with a portfolio of properties, and I would take that $100K property over the other every day and twice on Sundays.

    BTW, the"what if" example I gave you above....true story.  It happened.

    1Reply
  • Llewelyn A.
    Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes
    8y

    @Paul NA

    If you are saying meticulous analysis of future economics and projections of cash flow is the Midas touch, ok... I can accept that!

    My background is starting from a REALLY poor immigrant coming to NYC in the late 60s. The 70s was the absolute worst. It's really a rags to riches story that I basically tell from these postings. Really, anyone can do it if you apply more than some adherent cash flow now calculations.

    I even think that there are some guru classes that seem to even ask their students to look for City Planning Developments, etc. so that they can buy ahead of it.

    When House #2 is only analyzed on a Cash Flow basis and you ignore all other aspects of what makes a property valuable in the future, it's more like judging a book by it's cover. There is a lot more to  an Investment than meets the eye.

    I know that many of the folks here don't seem to care about things like 10 year pro-forma projections and Internal Rates of Return (IRR). However, it's industry standards for sophisticated investors, especially on the Commercial Side.

    I'm hoping that some readers will say... wait... it's not about dumb luck (the midas touch).... it's about MATH and Economics! Maybe that's the real secret to becoming a Millionaire Real Estate Investor!

    The problem is that the best Books about Real Estate Math is virtually unknown and certainly not a best seller. Books like What Every Real Estate Investor Needs to Know About Cash Flow

    will just not sell and the readers, who are aspiring millionaire investors won't bother to try to understand the Math. Yet this is EXACTLY what they need.

    2Reply
  • Eric James
    Investor · Malakoff, TX · Member since 2017 · 2k+ posts · 2k+ votes
    8y

    The correct comparison isn't 5 houses at $120,000 with positive cash flow vs. 1 house at $600,000 with no (or negative) cash flow. In the case of 5 positive cash flow houses you also need to include all the future properties the positive cash flow will allow you to purchase and gain additional cash flow etc.

    1Reply
  • Stuart M.
    OP
    Boca Raton, FL · Member since 2017 · 111 posts · 45 votes
    8y
    Originally posted by @Christian Hutchinson:

    Option #2 makes no sense to any investor:

    I am going to park $500K into an asset that gives me nothing in return.  So in 30 years It wont even double in value. Meanwhile, things, break, you have vacancy, etc.  Lastly, in 30 years the property won't be worth that much unless improvements are done (roof, furnaces, kitchen, upgrades, etc). There is a real opportunity cost in doing this "mythical" investment and ongoing costs. You might as well buy gold bars, silver, and wheat)

    You consider even less effort can be placed in the an Index Fund for the S&P, Dow, Nasdaq, Muni Bonds, Heck even a Money Market Fund, and my money would be liquid, and gain way more money.  I could buy a Life Insurance Policy that could quadruple in value in that same time frame, and becomes liquid in 10 years. Thats passive investing.

    Or I could become an active investor in a management group and buy a franchise. If Option #2 was for 4x-6X increase that is different also I'd take that bet (like a new transit point is being built and this property is near it). To consider the stock market will double every 10 years historically its a much easier investment.

    Now if your argument was buying 20 acres of woodlands on undeveloped land on the edge of town thats a different ball game.

     25k cash invested at 7% for 30 years is 190k.  A life insurance policy that costs 25k that "quadruples" in 30 years is 100k.

    The lower of the two houses was 857k after 30 years.  The point is to use leverage (mortgage from bank and tenants paying said mortgage.)

    I used a 2% estimate for appreciation so as to not skew the example, and because that is the expected rate of appreciation if housing prices continue to track inflation, on average, and inflation averages 2%.  Of course you start winning lottery type money if appreciation is more like 4% or 12% per year.  I'm just trying to see how houses like House 1, even using conservative numbers, comes out ahead.  I'm not making predictions here about different cities, etc.

    0Reply
  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    8y
    Originally posted by @Llewelyn A.:

    @Paul NA

    I know that many of the folks here don't seem to care about things like 10 year pro-forma projections and Internal Rates of Return (IRR). However, it's industry standards for sophisticated investors, especially on the Commercial Side.

    will just not sell and the readers, who are aspiring millionaire investors won't bother to try to understand the Math. Yet this is EXACTLY what they need.

    Do you realize how condescending that comes across? You're so much better than all of us little country bumpkins? 

    2Reply
  • Stuart M.
    OP
    Boca Raton, FL · Member since 2017 · 111 posts · 45 votes
    8y
    Originally posted by @Corby Goade:

    It's like Robert Kiyosaki said- how many houses can you buy with $75 negative cash flow? Ten? Three? How many houses can you buy with positive cash flow?

    "As many as I can find."

    Appreciation and equity are awesome, but at some point, you run out of cash, equity and/or hit a DTI ratio that makes you unfundable. Positive cash flow and proper management will allow you to keep going forever.

     20?  I'd take 20, if they're worth 500k each and money down was minimal.  They'll all be break even soon enough - probably next year when I increase the rent $75.

    But seriously, I was saying a breakeven house in a nice area vs. a fixer-upper in a worse area.  If they require the same cash out of pocket, which is better in the long run?  The main argument seems to be "the cash flow house has more potential to make it to the long run."  I get that.

    0Reply
  • Paul NA
    Investor · White Plains, NY · Member since 2017 · 17 posts · 11 votes
    8y
    Originally posted by @Llewelyn A.:

    @Paul NA

    If you are saying meticulous analysis of future economics and projections of cash flow is the Midas touch, ok... I can accept that!

    My background is starting from a REALLY poor immigrant coming to NYC in the late 60s. The 70s was the absolute worst. It's really a rags to riches story that I basically tell from these postings. Really, anyone can do it if you apply more than some adherent cash flow now calculations.

    I even think that there are some guru classes that seem to even ask their students to look for City Planning Developments, etc. so that they can buy ahead of it.

    When House #2 is only analyzed on a Cash Flow basis and you ignore all other aspects of what makes a property valuable in the future, it's more like judging a book by it's cover. There is a lot more to  an Investment than meets the eye.

    I know that many of the folks here don't seem to care about things like 10 year pro-forma projections and Internal Rates of Return (IRR). However, it's industry standards for sophisticated investors, especially on the Commercial Side.

    I'm hoping that some readers will say... wait... it's not about dumb luck (the midas touch).... it's about MATH and Economics! Maybe that's the real secret to becoming a Millionaire Real Estate Investor!

    The problem is that the best Books about Real Estate Math is virtually unknown and certainly not a best seller. Books like What Every Real Estate Investor Needs to Know About Cash Flow

    will just not sell and the readers, who are aspiring millionaire investors won't bother to try to understand the Math. Yet this is EXACTLY what they need.

     Midas Touch not because of the "Math" but because you make it sound like just because you prepare a spreadsheet its a done deal.  Unfortunately there are factors you can't pickup in spreadsheets...thats why they call it Risk...and yes your risk tolerance is higher then mine or others.

    And the whole thing about starting from a poor upbringing...well...welcome to the club...thats 90% of us here, no need to mention that.

    I just think option #2 is very risk, thats all...not that it won't come true with some modifications.

    0Reply
  • Stuart M.
    OP
    Boca Raton, FL · Member since 2017 · 111 posts · 45 votes
    8y
    Originally posted by @Jason D.:
    I think you are making a lot of assumptions that help you lean toward the $500k house. First, assuming a $100k property is in a war zone is dead wrong. A $100k fixer could easily be in a B+ to A neighborhood in most of the country. Second, you are assuming that the $100k property is still worth $100k after a $20k renovation, which would be a terrible investment. In my world, that house should be worth $200k-$250k after repairs. So that gives you up to $100k instant equity to use towards another purchase, whereas you purchased the $500k property at market value, with no equity. I would pick option 1 without hesitation. Cash flow every month, instant equity, and the ability to buy several more properties with the same cash in deal.

     I admit I was thinking in South Florida.  And there are almost no $100+20=250's down here.  Someone else is offering 190 for it.  The whole game is to find way below market price houses, I get that.  But that's not really repeatable in an area like this.  Like I said before, we have people offering 600k cash to get a place that cashflows 1k a month.  It's insane.

    And we can't/won't move and I don't want to long distance anything.  I'm looking for realistic strategies down here.

    0Reply
  • Stuart M.
    OP
    Boca Raton, FL · Member since 2017 · 111 posts · 45 votes
    8y
    Originally posted by @Eric James:

    The correct comparison isn't 5 houses at $120,000 with positive cash flow vs. 1 house at $600,000 with no (or negative) cash flow. In the case of 5 positive cash flow houses you also need to include all the future properties the positive cash flow will allow you to purchase and gain additional cash flow etc.

     Yes, that is a consideration I should take into account.  But just like one assumes access to more upfront funds, the other assumes access to certain inventories that may not exist.  I actually think either one could be a winner, but both have to be found and acquired.  I would personally take either right now.  This whole discussion was to see if there was something big that I totally left out.

    0Reply
  • Stuart M.
    OP
    Boca Raton, FL · Member since 2017 · 111 posts · 45 votes
    8y
    Originally posted by @Michaela G.:
    Originally posted by @Stuart M.:
    Originally posted by @Michaela G.:

    @Llewelyn A.

    Then lets compare those scenarios with 'all cash'

    1. pay 100K and get 2K per month - that's roughly 24% ROI

    2. Pay 500K and get 4K per month - that's roughly 10.4% ROI

     Wellllll....not exactly.

    Implicit in the scenarios is that with House 1, other expenses are $1046 ($137 mortgage balance reduction and $500 cash monthly and $317 interest to bank) and other expenses in house 2 are $1733 ($684 mortgage balance reduction monthly and $1583 interest to bank).

    So if you paid cash, House 1 is $954*12/120k = 9.54% ROI and House 2 is 2267*12/500k = 5.44% ROI. I will stipulate House 2 is dumb if paid in cash, but in reality, the point is to leverage the banks money to acquire more land. I don't have 500k laying around and if I did, that's up to 20 downpayments on other nice houses....

    Huh? My numbers are based on 'all cash', so, why are you throwing morgages in there? 

     Because there are expenses that are not the mortgage in the original scenarios, so I backed out the mortgages.  In scenario one it was implicit that taxes/insurance/etc were 1046/mo and in scenario two it was implicit that taxes/insurance/etc were 1733/mo.  Then you get to keep the rest of the rent every month if you paid cash.  Then I calculated the returns.

    0Reply
  • Llewelyn A.
    Investor / Broker · Brooklyn, NY · Member since 2016 · 665 posts · 1k+ votes
    8y
    Originally posted by @Michaela G.:
    Originally posted by @Llewelyn A.:

    @Paul NA

    I know that many of the folks here don't seem to care about things like 10 year pro-forma projections and Internal Rates of Return (IRR). However, it's industry standards for sophisticated investors, especially on the Commercial Side.

    will just not sell and the readers, who are aspiring millionaire investors won't bother to try to understand the Math. Yet this is EXACTLY what they need.

    Do you realize how condescending that comes across? You're so much better than all of us little country bumpkins? 

     You are right! Sorry all for that.

    If you can bare with me a bit to re-phrase it.

    I think you cannot just make a simple calculation based on Cash on Cash Return (CoCR). There needs to be a more sophisticated, all inclusive calculation normally done on a Spreadsheet.

    One book I can highly recommend is What Every Real Estate Investor Needs to Know About Cash Flow

    It's a really great book but will not show up on a best seller list.

    I do think that if Investors were to study the Cash Flow Calculations in this book, it can lead to other ways of thinking and possibly a different way of investing.

    1Reply
  • Michaela G.
    Investor · Atlanta, GA · Member since 2013 · 3k+ posts · 3k+ votes
    8y

    @LLewelyn,

    But the OP is not throwing out a sophisticated scenario. In fact, his scenario seems to even be based on potential mortgage fraud, since he's clearly talking about an investment property, so, why throw in all of these extras? 

    Nobody is criticizing your strategy, which seemed to have worked for you, so, why do you feel that this would be good for the OP? It seems that you're taking it personal.....and you shouldn't. What works for one does not mean that it works for others, if they're in a different situation.

    My strategy is one that most investors wouldn't touch, yet, it works for me. But I constantly talk others out of it, because I don't think they're in the position to recreate what I've been doing. 

    And that doesn't mean that I don't think on several levels. I may be blonde, but that purple gives me some artificial intelligence ;-).  I bought low-income 10K houses, that are connected (I have 2 assemblages)  and which were/are in the way of development. While I've had the cash-flow all along, I also have much icing about to be poured onto the cake. 

    0Reply
  • Stuart M.
    OP
    Boca Raton, FL · Member since 2017 · 111 posts · 45 votes
    8y
    Originally posted by @Jason D.:
    I think you are making a lot of assumptions that help you lean toward the $500k house. First, assuming a $100k property is in a war zone is dead wrong. A $100k fixer could easily be in a B+ to A neighborhood in most of the country. Second, you are assuming that the $100k property is still worth $100k after a $20k renovation, which would be a terrible investment. In my world, that house should be worth $200k-$250k after repairs. So that gives you up to $100k instant equity to use towards another purchase, whereas you purchased the $500k property at market value, with no equity. I would pick option 1 without hesitation. Cash flow every month, instant equity, and the ability to buy several more properties with the same cash in deal.

     I know its not normal to reply to a post twice but this made me think.

    What originally got me thinking about all of this is the fact that I do all the work myself on the houses I buy.  And you're constantly being told that you have to calculate how much you're making, that you have to "pay yourself."  You do 1000 hours of work and your house is now worth $5k more, congrats, you just made $5/hr.

    I guess what I'm getting at is, you're working hard and doing all these repairs (or spending your hard earned dollars) to have a 200k crap house all fixed up and rented, but for 25k down could you just buy a turnkey house, do no work, and rent it and be better off in the long run?  The neighbors next door to the house in Boca rent, and when rents are 3k+, you're not dealing with the same people paying 1k, its less work on average.  He got a tenant and collects a check.  And appreciation.  And if you don't assume an MSA is going down, you're more likely going to get a higher rate of appreciation in good areas than bad areas.  I mean, there are even places in detroit that have appreciated over the last few decades, but it wasn't the cheap areas.  I know what I'm "supposed" to do - buy 100k, put 25k cash out, worth 200k, get my 150k back out, rent for 2.5k, but its A) not as realistic in areas like CA, NYC, MIA that have bad rent to price ratios and/or a plethora of investors willing to follow a 1.5% or 1% "rule," and B) sometimes I wonder if the amount of work going into the lower properties is being accurately accounted for.  Fixing, chasing rent, and a lack of appreciation relative to nicer homes, just the headache and worries of worse areas, five houses instead of one, fifty houses instead of ten, etc.

    I'm really not opposed to either one and how/why we acquired the Boca house wasn't based on this "idea" - it is a weird story - but events I've witnessed have got me thinking...are we accurately projecting the costs/returns here?  Which one really is better in the long run?

    0Reply
  • Stuart M.
    OP
    Boca Raton, FL · Member since 2017 · 111 posts · 45 votes
    8y
    Originally posted by @Michaela G.:

    But the OP is not throwing out a sophisticated scenario. In fact, his scenario seems to even be based on potential mortgage fraud, since he's clearly talking about an investment property, so, why throw in all of these extras? 

    Nobody is criticizing your strategy, which seemed to have worked for you, so, why do you feel that this would be good for the OP? It seems that you're taking it personal.....and you shouldn't. What works for one does not mean that it works for others, if they're in a different situation.

    My strategy is one that most investors wouldn't touch, yet, it works for me. But I constantly talk others out of it, because I don't think they're in the position to recreate what I've been doing. 

    And that doesn't mean that I don't think on several levels. I may be blonde, but that purple gives me some artificial intelligence ;-).  I bought low-income 10K houses, that are connected and which were/are in the way of development. While I've had the cash-flow all along, I also had much icing about to be poured onto the cake. 

     Live there for a year, do 10 in 10 years, now you're up to 5 mil in properties, cmon.

    But anyways I'm looking for people to poke holes in my idea and make sure Ive considered all the different angles.  I could have just rationalized all this quietly myself and just gotten on with it, but that's not what I was looking to do.

    Again, I could do the scenario with 20% down or 10% down or 25% down and different house prices and repair costs and etc etc etc.  But sometimes using two specific hypothetical examples helps to keep everyone on the same page and not introduce unnecessary variables.

    1Reply
  • Jason D.
    Rental Property Investor · St. Petersburg, FL · Member since 2017 · 3k+ posts · 4k+ votes
    8y
    @Stuart M. it's all about what your goals are. My goal is to retire in 5 years or less, and to achieve that goal, I need to acquire cash producing properties. If my goal were to increase my net worth and retire at 60, property 2 may be a better play. I live in the Philly suburbs, where property taxes kill cash flow to the tune of $500-$1000 per month, so I have decided to, coincidently, move my family to Florida, because I can better attain my goals. These are all things that you need to consider when figuring out your plan. Personally, I've decided to keep my plan and change my location, rather than keep my location and change my plan.
    1Reply
  • Stuart M.
    OP
    Boca Raton, FL · Member since 2017 · 111 posts · 45 votes
    8y
    Originally posted by @Cara Lonsdale:

    So when do you intend to sell propert # 2?  What if you are at the point of retirement, and need to cash out to get that equity, and it is 2008.....and now your property is NOT worth $905K, but rather $290K, and you are at a loss.

    THEN what if NOT ONLY do you have no cash flow, but now it is NEGATIVE, because not only the RE sales market tanked, but also the rental market tanked, and you are paying OUT $1,250 per month just to hold on to the property that isn't worth the money you paid for it years ago?

    Cash flow is important for many reasons.  However, it's required in order to bridge the gap between market waves.  When appreciation becomes depreciation, cash flow is what will get you through to make sure that your decision to sell is based on a favorable choice, not a requirement.

    A smart investor will buy and sell in any market condition, but will shift to accommodate that condition.

    I know it is easy to put pen and paper to calculate a perfect scenario.  However, there are alot of unknowns out there that make your calculations irrelevant.  I am a Realtor (since 1997) and a seasoned investor (since 2002) with a portfolio of properties, and I would take that $100K property over the other every day and twice on Sundays.

    BTW, the"what if" example I gave you above....true story.  It happened.

     I'm trying to isolate a few variables here, not throw some more on the pile.

    But it its 2008, the stock market cratered even more than the average house price, so what if all that money you made from investing your cashflow for House 1, 640k, is suddenly cut in half, but my home value has only declined 40%?  What if there is a plague and half of everyone dies, how does this effect home prices and rents?  What if we get into another housing bubble and I sell all my homes at the peak for millions and y'all are collecting 1k "cash flow"? What if...  We could play this game all day.  I chose a 2% conservative appreciation because that is what I expect inflation to average and house prices have tracked that over the long run.  It could change!  If we are in a recession the exact year I want to retire, I will go on SS, go live in a shack and wait it out.  We're talking about 3 decades from now.

    Rent prices did not decline much in the last recession in most cities, if at all, I checked FRED.  I can't imagine we'll have a worse fall from prices right now than we did back then.  If we fall from higher rents, well, then my cash flow will be reduced just like everyone elses.  A lot of people lost during the downturn, even "cash flow" investors. A lot of it had to do with what city you were lucky/unlucky enough to buy in and other things beyond your control.  I get that nothing is guaranteed.

    0Reply
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